R&D tax credits as a great source of funding
The average UK annual claim for an SME is £46,000! This is great news, as it means that R&D tax credits are an excellent source of funding for many start-ups and scale-ups. Where your business is developing new products, processes or services, it can claim a cash payment or tax reduction on the R&D costs incurred. There are two ways for you to benefit
Option 1: 46% of R&D spend off corporation tax payable
A profitable Scale-Up can claim an enhanced expense of a further 130%. For example, £100k of R&D becomes a deduction of £230k against taxable profits and reduces the tax bill by £46k (£20k being corporation tax relief, and £26k being the enhanced R&D relief).
Option 2: 33.35% of R&D spend cash back NOW!
A loss-making Start-Up can request a tax credit to be repaid to the company. This is at 14.5% of the loss. For example, an R&D spend of £100k is firstly enhanced to £230k and then relief calculated at 14.5% results in a refund of £33.35k.
3 Common questions asked of R & D Credits
1. Are we eligible for R&D tax credits?
If your business is taking a risk by innovating, improving or developing a process, product or service, then “Yes!”. Talk to us.
2. How do we determine the extent to which we are eligible?
The three key criteria in determining whether an innovative company is eligible for R&D tax credits are assessing
- The systematic, investigative or experimental nature of the project
- If a scientific or technological advancement is sought
- If a scientific or technological uncertainty is being resolved.
Specifically, HMRC will look at whether there is an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty. They distinguish this from using existing knowledge or capabilities to improve existing systems or develop new systems.
3. What expenditurse is allowable?
Revenue expenditure, and in some cases also capitalised revenue expenditure, across three main areas
- Staff costs (gross salary, employers NIC, pension contributions etc)
- Consumable items (i.e. heat, light & power, materials and equipment 'used' and/or 'transformed' by R&D process).
The timing of your claim
There are two tactical moments to apply. These will help your chances of success With your corporation tax return. This is if the company has had a loss-making year and is recommended if cash flow is required When your company is profitable. You can claim the maximum relief against Corporation Tax A monthly application is generally not recommended as fees and management time cost are too great.
3 things unregulated R&D “consultants” might not tell you…
- HRMC starts by reviewing whether the company is trading or not, if it is solvent and finally the breakdown of the costs. Especially in loss-making companies there are cases of R&D consultants and SMEs overstating the claim. This makes HMRC often unwilling to review a claim.
- When HMRC starts an enquiry into R&D claims much time is spent arguing the case. Especially if HMRC are paying cash back!
- An experienced regulated, chartered accountant will be able to identify qualifying costs (including proportion of staff costs involved in R&D or project managing), to prepare the company for the likely HMRC queries.
How Ignition Financial can help
Ignition Financial can help Founders reclaim R&D credits and cash back. We are fully regulated by the ICAEW. Please give us a shout if you’d like help with this.